Friday, May 30, 2014

President Xi Jinping's recent emphasis on the necessity of the government and the market correctly playing their respective roles to promote the sustainable and healthy development of the economy should serve as a timely reminder that any over-use of either the visible hand or the invisible hand will produce the opposite effect.

The Third Plenum of the 18th Communist Party of China Central Committee held in November vowed to give the market a decisive role in the distribution of resources, the highest status the market has been extended since the launch of reform and opening-up in 1978, but this does not mean the negation of the government's role in economic development.

China's government-led economic model has helped the country score an economic success, but it has also caused serious imbalances in its economic structure and resulted in a series of contradictions, whose resolutions depend on more market vitality and the upgrading and transformation of the country's economic structure, said an article in 21st Century Business Herald.

To give the market a decisive role, the government should reduce its direct interventions into the distribution of resources and microeconomic activities and set up an open, competitive and orderly market system. One in which market forces can play a greater role in those economic activities that should be free of the government's visible hand.

The government should refrain from directly intervening in the market, transform its function, tighten market supervision, strengthen public services and promote social equity and justice.

To facilitate such a transformation of its role, the government should deepen the reform of its administrative system, innovateits management methods and improveits regulatory system.

Regrettably, local governments have not done enough to push forward corresponding reforms. At a time when the country's economic growth is slowing, there are voices calling for the government to use its visible hand to stimulate economic development, something that would obviously be a regression for the market mechanism.

With the economic slowdown being used by some local governments as an excuse to delay some reforms and transform their functions, President Xi's stress on the invisible and visible hands playing their proper roles should be heeded to ensure sustainable development in the future.

Comment

Chinese political dialogue has always headed under banners of pith sentences. The latest are to sloganise the “visible” and the ‘invisible” hands.

These are an inversion of the reality of how governments and markets work.

The same terms are used in the UK and USA. Social Democrats in the UK Labour Party are fond of making the same distinction and commonly use the “visible hand” to refer to government interventions (honest!) and “invisible” for market activities (suspicious).

Yet the reality is the exact reverse: Markets operate - can only operate - by VISIBLE PRICES and governments work by INVISIBLE POLITICAL PROCESSES protected by the Official Secrets Act).

No market anywhere works through invisible prices - nor is there an “invisible hand”. Such is the falsity of the proposition that there is such a miraculous entity working in markets, nobody can write a mathematical term for it in any mathematical equation relating to markets. Such is the inevitable failure to agree what the “invisible hand” does in market exchanges, economists choose to describe the “invisible hand” variously as: supply and demand, the (visible) price system, “markets”, Pareto’s theorems, even “general equilibrium” (a wholly imagined state in an equally imagined universe that does not exist). None of these constructs are applicable, or necessary to describe market exchanges and none can do better than the VISIBLE prices that are absolutely indispensable for markets to work.

Anybody equated with government decision-making processes, both in democracies and in dictatorships, knows that these processes are mostly invisible to outsiders who nevertheless constitute the majority of a population. That’s why retired politicans publish their memoirs to self-justify the hidden secrets of the decisions made or not made while they were in office. Classicaly, this week we learn that the public inquiry into the key decisions taken by governments to invade Iraq are to remain secret ‘for ever’.

Look at the words I marked in bold reporting the 3rd Plenum of the central committee of the CCP: “free of the government's visible hand” while it “tighten[s] market supervision”; and “reform[s] its administrative system, innovate[s]its management methods” and improve[s]its regulatory system”. Meanwile “government [is] to use its visible hand to stimulate economic development, something that would obviously be a regression for the market mechanism” and,piously "invisible and visible hands [will play] their proper roles”.

Undoubtedly there is a shift in public rhetoric towards more market freedoms and, regretably, openings for many more corruption scandals that plagued earlier looser market forms under the bribable supervision of key party functionaries across government, while each side supposedly plays “their proper roles”. (To be fair, China under total government planning was a mess, with corruption scandals even more serious and millions also died and suffered for decades).

The 3rd Plenum took place in November 2013. Its decisions are now coming to light after months of internal invisible government decision-making. That’s how governments work politically. Turning a Chinese government’s political decisions into administrative procedures and operating them through the millions employed in the state agencies is no less ‘invisible’ to the millions of citizens affected by them. But every participant in markets can operate knowing the visible prices in front of them and act accordingly.

SUPPLY AND DEMAND IN MARKETS WORK FROM VISIBLE PRICES NOT INVISIBLE HANDS!

“Was the classical illustration of Adam Smith’s invisible hand shown upside down between the curves of demand and supply in economics textbooks?”:

“The conventional model of textbooks (Figure a) [Frank, 1997; Slavin, 1988; Park et al., 2001; Brue, 2001; …] has confused the relationship of the curves of demand (D) and supply (S) from the very beginning. It’ll be straightforward and mathematically consistent by interchanging both curves in order to rationally and rigorously explain the mechanism of the invisible hand in fundamental market behaviors (as shown in Figures b, c and d). For details, see “Toward Formal Models of the Theoretical Framework of Fundamental Economics,” Fundamenta Informaticae, 90(4), 443-459 [Wang, 2009].”

Comment

Professor Wang seeks to demonstrate the existence of an “invisible hand’ using mathematics. However, he is wasting his talents. There is no “invisible hand”. Nor did Adam Smith claim there was an invisible entity called or describable as “invisible”.

The derivation of (always) VISIBLE prices is crucial to how markets work and how supply and demand are reconciled.

From Smith’s time, the “invisible hand” was and remains a “figure of speech” that “describes in a more striking and interesting manner” the hidden motives of real agents (people) that cause them to take or contemplate actions for their intended ends. (See Adam Smith, “Lectures on Rgetoric and Belles Lettres”, 1762-3, published by Oxford University Press, Oxford, p. 29).

Smith added that the intended actions (not their motives!) of agents may have “unintended consequences”, and in his three only uses of the metaphor of an “invisible hand” he illustrated the linked process that showed how an agent’s “intended consequences” from their motivated actions may have “unintended consequences”. (See Adam Smith’s: “History Of Astronomy” (posthumous) 1795; “Theory of Moral Sentiments” 1759, p. 184-5; and “Wealth Of Nations” 1776, p. 456).

WHEN STATE SPONSORED LICENSING IS AGAINST CONSUMER'S INTERESTS

“Occupational licensing can raise quality. It also raises prices, reduces output, and makes the labor market less flexible. Alabama policymakers would be wise to get rid of it.

In the first paper released as part of the Johnson Center at Troy University's Improving Lives in Alabama: A Vision for Economic Freedom and Prosperity—to which I have also contributed—economist Daniel J. Smith reviews the literature on occupational licensing. Contrary to his critics' charges, Dr. Smith is very much a citizen of "the real world." Licensing works against the interests of society by limiting the extent of the market.

That phrase might look familiar. As another economist named Smith—Adam Smith, in this case—famously wrote, "the division of labor is limited by the extent of the market." A large regulatory burden makes it harder for people to start businesses, limits the extent of the market, and ultimately makes us poorer.

…Licensure creates compulsory and unnecessary cartels for licensed services. Adam Smith also made another important point elsewhere in The Wealth of Nations, and it is central to Daniel Smith's argument:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary." [WN I.x.c.27: 145]

…As Daniel Smith points out in his study, quality control is an important problem. This helps us explain why certification emerges, but it doesn't necessarily justify licensing. Certification happens when an independent evaluator certifies that a product or service meets certain quality standards (the Good Housekeeping Seal of Approval, for example). Licensing, on the other hand, uses the force of government to prevent people from providing certain services.

…. Licensing’s defenders claim that they are there to protect the public, but this can be accomplished with certification. Licensing is unnecessary because certification can provide quality assurance while allowing people who are willing to accept more risk in exchange for lower prices to make that choice, as well.

Competition is a much more powerful quality regulator than many people think. I've heard a story about a barber who was worried when another shop opened across the street advertising $6 haircuts. He responded by hanging a sign reading "WE FIX $6 HAIRCUTS." I don't know if the story is true or not, but it illustrates two important points. First, quality isn't free. Second, a competitive market helps people find the combination of price and quality that they prefer to other feasible options.

Comment

I like this article in Forbes because it helps to clarify the distinction between ‘certification’ in markets and ‘licensing’ from State regulations. [Hat Tip to Art Carden]

Reputation in markets is a quality badge earned by providers of goods and services. Of course, some regulations are necessary (weights and measures, assay inspections, components' quality, and such like, where the State provides the certification independently of those providing the services.

This can cause localised problems when the state unilaterly decides on the measures, as in decimalisation or metrication. An incoming younger generation easily adjusts but the older generation used to the previous measuring system has to change the habits of a lifetime. This is something I experienced with metrication. I have no image in my mind as to the relative size of a milimetre versus a fraction of an inch, or a kilometre compared to a mile, or degrees centigrade verus Fahrenheit, and so on. But across society my problems in these regards are relatively short-term for me, but not for society lasting well into the future.

An early draconian law making it illegal to advertise or sell green grocery fruit or vegetables by pound weight typified the State at its worst even when both sellers and buyers were happy to have the choice. Eventually reason prevailed and individual buyers and sellers could choose which measure - and which currency - they wished to conduct their private business to the personal delight of some elderly purchasers.

When foreign exchange restrictions for currency changes were legally relaxed by allowing individual banks and foriegn exchange shops to decide their own rates there was some early disruptions in the different price rates charged by some sellers compared to others. A Tory MP complained loudly in the media that regulation should be re-introduced by government to stop ‘exploitation’ of consumer ‘ignorance’ - a prime example of the nanny-state mentality prevalent among politicians, including conservatives.

However, after a while, local radio and newspaper publicity of the exchange-rate prices, plus the resultant competition, narrowed the exchange-rate ranges on offer in the High Street. The market eventually addressed and solved the problem without state regulation. I well remember once in Communist Warsaw trying to change sterling pounds for zloty at the state’s official rates. I demurred and walked back to my train. Half-way along the platform the exchange-bureau manager caught up with me and quietly offered me a much better rate for cash pounds. Immediately, I agreed and we exchanged our money at the new, unofficial, rate, and I congratulated him on the lesson for communists of the superiority of markets.

With official, state-issued licences for activities best arranged via markets, the outcome is always lower supply and higher prices, not subject to competition. In short, Art Carden is absolutely right. The supplier’s reputation in a competitve market is the better regulator of quality than scores of expensive bureaucrats in their plush offices, expensive pensions and other perks.

Congratulations to Art Carden, Daniel Smith and Forbes for this excellent article and, of course, Adam Smith for his observation on the merchants' proclivity for 'conspiring against the public interest', if they can get away with it, by persuading gullible or 'bribable. politicians to legislate to promote their monopoly 'licensing' schemes.

“Outside the Edinburgh building where I was speaking, there was a statue of Adam Smith, the great 18th Century Scottish economist. His most famous idea, explained in his book The Wealth of Nations, was to promote division of labour as a means of raising production, thereby realising economies of scale.

An independent Scotland would directly contradict Smith’s wisdom and advice, entailing replication of labour and diseconomies of scale. It would mean setting up expensive and unnecessary new administrative bodies, new tax collecting offices, new customs barriers – all the things that a modern, open, outward-looking economy should minimise.”

Comment

I comment on David Nicholson’s first reason because he quotes from Adam Smith (his other 4 reasons are his personal opinions and not germane to Lost Legacy).

The division of labour has an extremely long history (and what is wrongly called ‘pre-history’). It is not dependent on any single country, large or small. It did not begin with the Union of the Kingdom of Scotland with the Kingdon of England in 1707, and it would continue long after Scottish independence as it did before.

The Britsh colonies in North America survived well after their independence and demonstrated the universality of the division of labour and its related consequences in inter-country trade (as did France when it finally shook-off English ambitions to remain an English kingdom -and likewise all over the world).

‘Diseconomies of scale’ are not explained by David Nicholson, so we cannot judge if he is aware of its relative importance or unimportance. Many products invented, designed, produced, and marketed in Scotland, have been contributed to by foreign economies, are bought in foreign economies, and are competed against by foreign (and Domestic) economies. It’s called world trade.

Smith advocated ‘freedom of trade’ against ‘mercantile anti-trade’ policies. David seems to disregard the political eocnomy of Adam Smith. As a contributoir to the statue of Adam Smith, which he invokes at the head of his article, I did so in part because as a supporter of Scottish independence I support Smith's ideas in total regarding free trade in Scotland. None of such support leads to Scotland being politically a small part of the UK, managed from London. Long before the 'independence' referendum, I supported vocally devolution from the 1979 referendum onwards. I shall continue to vote 'Yes' for devolution if the independence referendum fails, and should an 'independence' referendum be repeated, I shall again vote 'yes'.

Independence does not mean “entailing replication of labour and diseconomies of scale”. Trade circumvents such alleged consequences. There is no danger to the people of Scotland from not having, say, a car industry, because these are physically built elsewhere in several countries beside England that trade with Scotland (and incidentally foreign cars also benefit from Scottish innovation in common fields of commercial interest).

Scotland has a monopoly of Scottish malt whisky, protected by international copyrights. Most products consumed in Scotland are produced all over the world without Scotland protecting itself by consumming only that which it has produced. Part of what pays for them are products like Malt Whisky, sold everywhere outside Scotland (in small French villages you can buy the very best malt whisky brands). Scottish oil is also exported across the world, prices determined competitively, without insisting that all economies of scale in oil production are realised within Scotland - a nonsensical idea!

Incidently, the point about ‘economies of scale’ has little to do with the division of labour - it was about raising productivity per capita of labour to raise total output and thereby lower the unit prices of output. That's part of market capitalism! None of these processes are precluded or indeed inhibited by an independent Scotland. If such a notion were true than every country in the world would need to join the UK!

The biggest threat to Scotland’s interests are if the UK in 2017 votes to leave the European Union, taking Scotland unwillingly with it (because by voting ‘No’ in 2014 and staying with the UK we would have to go with them). The fact that ‘NO’ voters continue tying Scotland to the fortunes of Tory/UKIP voters in England is a ‘wake up’ call to Scottish voters.

I suggest that David re-thinks his propositions and his undoubted concerns.

Wednesday, May 28, 2014

CHINA NEEDS LESS, NOT MORE, GOVERNMENT,

“Xi Jinping stressed in the Politburo collective study 'Invisible hand' and the 'visible hand' to be used for good

According to Xinhua News Agency, Beijing, [State managed news agency] Politburo (26 May) … the market play a decisive role in the allocation of resources and better play the role of government conduct collective study of the Fifteenth CPC Central Committee. General Secretary Xi Jinping hosted learning. [He] stressed, … the market from a decisive role in allocating resources, better play the role of government, is not only a major theoretical proposition, but also a significant practical proposition. scientific understanding of this proposition, accurately grasp its meaning, to comprehensively deepen reforms and promote social market economy healthy and orderly development of great significance in the market on the issue of the role … of government, talk about dialectics, Two Points, the 'invisible hand' and the 'visible hand' to be used for good, and strive to create the role of markets and the government of organic unity, mutual complement, mutual coordination and promotion of the pattern, and promote the sustained and healthy development of economy and society. …

Xi Jinping presided over the study gave a speech noting that scientific macro-control, effective governance, is to play the advantages of the socialist market economic system, the inherent requirement. Better play the role of government, it is necessary to effectively transform government functions and deepening administrative system reform, innovation management style, a sound macro-control system, strengthen market supervision activities to strengthen and optimize public services, promote social justice and social stability and promote common prosperity (http://www.wantinews.com/). governments at all levels must strictly according to law, and effectively perform their duties, the tube what it should do well, tube in place, the place must be put right foot, put in position resolutely overcome the dislocation of government functions, offside, the absence of the phenomenon.”

Comment

A not very clear exposition of what the Central Commitee intends to happen in the Chinese econony. As far back as the mid-1930s, Oscar Lange a US/Polish economist, wrote from Chicago University, on the “Economics of Socialism”’ and opined the view that ‘neo-classical’ markets could be improved if they were supported by state bureaucrats, who had drawn up national plan for Poland, instead of leaving it to the “invisible hand”.

This was fairly early exposition of the myth of the “invisible hand’, long before Paul Samuelson, then an undergraduate at Chicago University, who ten years later was to be the decisive influence that spread the “invisible hand” myth in his spectacular (in sales terms) undergraduate textbook, “Economics: an introductory analysis”, 1948, McGraw-Hill, New York. (See Kennedy, G. “Paul Samuelson and the Invention of the Modern Economics of the Invisible hand”, Journal of the History of Economic Ideas, 2010).

The idea that markets which were led by a mysterious entity known as “an invisible Hand”, and linked to Adam Smith’s use of the metaphor in Wealth Of Nations (WN IV. ii.9: 456) was thought to be a challenge to those seeking political power to replace capitalism with rationally-planned economies. Of course, such utopian dreams failed, and in Poland’s case before they could get started - the Stalinist planners removed idealists like Lange and imposed communist dictatorships instead. There was no “invisible hand” miraculously in markets and no replacement for anarchistic markets in state planning. Moreover, Adam Smith never said anything like Lange, Samuelson, and most modern economists ascribed to him.

Apparently, the myth that state planning is workable in modern complex market economies or that government political planners should continue to try their hand at running markets has become the guiding myth of the Chinese Communist government: “Better play the role of government, it is necessary to effectively transform government functions and deepening administrative system reform, innovation management style, a sound macro-control system, strengthen market supervision activities to strengthen and optimize public services, promote social justice and social stability and promote common prosperity (http://www.wantinews.com/). governments at all levels must strictly according to law, and effectively perform their duties” with the rest of the barely readable sentence lost in translation, viz: “must be put right foot, put in position resolutely overcome the dislocation of government functions, offside, the absence of the phenomenon”.

The likelihood of these aspirations ever working in China as intended is remote. Hayek long ago dismissed such aspirations for replacing markets with calculated planning. You can undermine markets, bleed them dry, regulate them to death, and impose political mandates at will. But legislate them to work to some pre-prescribed social directives? Never! You cannot design social orders, you cannot pre-design innovation, you cannot plan the market’s future and continuing ‘creative destruction’, the dispersed entrepreneurial imperatives, the next technological leap, or the necessary rise in per capita incomes to levels undreampt of by our grandparents or sought for by our grandchildren.

Xi Jinping’s ambitions, for all of his undoubted political powers, inevitably will be frustrated, perhaps at high social cost like Mao’s before him. Undoubtedly he intends well for China and its people. However, everything depends on the extent to which his government aims to inculcate into China’s political culture the ethos of ‘markets where possible; state where necessary’, with the balance in China’s case shifted in favour of markets and the politics of China reformed around Liberty, not CCP monopoly.

Sunday, May 25, 2014

IS ECONOMICS AS A UNIVERSITY SUBJECT IN TROUBLE?

John Kay, Visiting Professor of Economics at the London School of Economics and a regular columnist for the "Financial Times”, posts (23 May) HERE and re-posted on Social Europe Journal HERE

“Angry Economics Students Are Naive – And Mostly Right”

Students of economics are in revolt – again. A few years ago, even before the crisis, they established an “autistic economics” network. After the crisis, in 2011, a Harvard class staged a walkout from Gregory Mankiw’s introductory course. That course forms the basis of textbooks prescribed in universities around the world. This year, 65 groups of students from 30 countries established an International Student Initiative for Pluralism in Economics. In no other subject do students express such organised dissatisfaction with their teaching. …

It seems, however, to little lasting effect. Impermanence is inherent in student life: they don suits, collect their first salary and leave their complaints behind until the same gripes are rediscovered by a new group of 19-year-olds with similar naive hopes of changing the world. Still, recurrent dissatisfaction among both students and employers suggests they have a point.

A problem specific to economics is that students suspect the material they are taught is designed to offer intellectual cover for rightwing ideology. …

Why Do Economics Students Chose Their Subject?

As are their students. The real burden of their complaint is not a political protest. As I did, they chose to study economics in the hope of solving, or at least understanding, real world problems: poverty, inequality, inflation and financial crises. But their classroom experience is narrower and less satisfying than mine was. They find themselves engaged in rote learning of models based on rational choice. They are fobbed off with assurances that acquisition of these skills is a necessary foundation for understanding of the great issues of the day; but somehow these great issues never make it into the curriculum. They suspect, rightly, that many of their teachers are not much interested. This is the burden of a powerful and detailed critique of their course prepared by students at the University of Manchester.

Their demand for more pluralism in the economics curriculum is well made. Yet much of the “heterodox economics” the Manchester students suggest including is flaky, the creation of people with their own political agenda, whether Marxist or neoliberal; or of those who cannot do the mathematics the dominant rational choice paradigm requires. Their professors reject the introduction of these alternative schemes for the same good reasons their science colleagues would reject phlogiston theory or creationism.

Yet teachers are mistaken in their conformity to a single methodological approach – encapsulated in the claim that has taken hold in the past four decades that approaches not based on rational choice foundations are unscientific or “not economics”. The need is not so much to teach alternative paradigms of economics as to teach that pragmatism, not paradigm, is the key to economic understanding.

This eclecticism is reflected in the curriculum proposals being developed by the Institute for New Economic Thinking, led by Professor Wendy Carlin of University College London, on whose advisory board I sit. The subject of economics is not a method of analysis but a set of problems – the problems that drew students to the subject in the first place. The proper scope of economics is any and all ideas that bear usefully on these topics: just as the proper scope of medicine is any and all therapies that help the patient.

Comment

I have known John Kay since we both were undergraduates, he at Edinburgh University and me at Strathclyde University (Glasgow), with a common friend in Robin Cook (who became foreign minister in a Labour Government). John Kay has enjoyed a long-standing career as a talented economist at the highest level in both UK public office and in UK academe. In political philosophy he has always been of a moderately and consistently ‘soft’-leftist disposition.

At the time of student criticism of economics at Manchester University and Harvard I commented on ‘Lost Legacy’, joining my long-standing and continuing criticisms of “rational expectations” and “selfish self-interest” distortions of Adam Smith’s legacy, not to mention my critiques of the rampant myths of “invisible hands” supposedly working as an entity in markets to “benefit all”.

I note that John reports on the usual attempted put-down of those who alllegedly “cannot do the mathematics the dominant rational choice paradigm requires”. This is not true in my case nor is/was it true generally among critics of the neoclassical paradigm, many of whom I know are accomplished in higher maths. Long ago, to help students in classes taught at Strathclyde University, I authored “Mathematics for Innumerate Economists” (Duckworth, 1982) and “Invitation to Statistics”, Blackwell, 1986), both still available via Amazon, which readers reported their thanks and several academics thought addressed a gap among students in the 1970s onwards.

Those who seek comfort for their ideological views in defence of a false paradigm by ignoring the evidence of economists who know the fairly easy mathemics used in the economics of rational choice theories as well as the arrogant neoclassicals who currently dominate modern (smaller) economics departments in the ‘naughties’.

The truth is that the maths do not make true the unrealistic assertions about human behaviour with lines like justifying serious criticism of “rational choice” theories in the same manner as “their science colleagues would reject phlogiston theory or creationism”. Professors I heard first-hand used to dismiss criticism of Friedman’s “positive economics” theories with their authoritative lines that the ‘realism of predictions did not matter, so much as the validity of the predictions’, as if this assertion itself made their predictions true! That’s why economic theories are in such a mess today.

The problem may well be unresolvable now given the variety of different ‘economics’ schools of thought that barely coexist in the discipline, which ideologically is divided now as ever. No school, left or right of centre, has a monopoly of truth or even realism.

The earlier dissatisfaction that set in during the 1990s is getting closer to a major turn-off of new students’ recruitment to Econ 101, which in time will slow down recruitment to final Honours Years, and in some places denudes classes to the new status economics becoming a non-viable subject. This has already happened to the ‘History of Economic Thought’ as a mainstream subject, not least because mainstream economic’s professors earlier squeezed out recruitment/promotion opportunities for candidates who do not meet their narrow subject criteria over a number of decades (though a well-fought rearguard action by scholars has done much to hold the line, albeit with a much denuded presence in several major institutions.

Whether the Institute for New Economic Thinking, led by Professor Wendy Carlin of University College London, as reported by John Kay, will help to save the day for sufficient academic courses in economics is uncertain at present. I hope it is safe and and I wish its sponsors well in their endeavours.

Wednesday, May 21, 2014

“POVERTY MORE IMPORTANT THAN INEQUALITY”

Deirdre McCloskey is to be interviewed on BBC 4, 26 May, next Monday evening, 8.30 pm HERE on an explosive theme for activists and revealing for Smithian scholars.

“Evan Davis interviews economic historian Deirdre McCloskey in front of an audience at the London School of Economics, where she argues that poverty matters more than inequality. She describes how at the beginning of the 19th century most people who had ever lived had survived on $3 a day. Today, on average, people in Western Europe and North America live on over $100 a day. Although Professor McCloskey is an economic historian, she says we can't explain this 'Great Enrichment' using economics alone. She also argues that capitalism is an inherently ethical system, and that it would be a mistake to prioritise equality over innovation. Prof McCloskey talks about the role of ideas and attitudes in creating modern prosperity and discusses what her study of history tells us about where our priorities should lie today.”

Comment

Sounds like something I would agree with. To focus solely on inequality, as the activists concerned with the “99-1” ratio do, is in my view to miss the point, and to lead off into a great diversion of political energy, such as I was trailing on Sunday last: “ADAM SMITH'S UNDERSTANDING MORE USEFUL THAN KARL MARX'S CAPITAL”.

I suggested then:

“In the meantime, I have been thinking about inequality in the rich countries and what it means. I have been struck for many years by the phenomenon of inequality and why we appear to be concerned about it, particularly as some of the reasonably well-off middle-classes in the richest economies are expressing strong views about it.”

Meanwhile, in the poorest countries, where serious poverty is rampant and incomparably worse than ‘poverty’ in the richest countries, and migration traffic is all one-way towards becoming ‘poor’ in the richest countries, where those in ‘poverty’ there, bad as it they are compared to the majority, are incomparably ‘better off’ than the poorer migrants from whence they came from, usually at great personal risk and incredible relative expense.

What made poverty so discriminatory in the poorest countries (where the richest ‘1%’ - or even the richest ’20%’ are also less rich than the richest in the richest countries) to cause such anguish for the abundant well-off middle-class activists in the richest countries?

We can extend that comparison to compare the majority of the populations in the richest countries today with their richest predecessors (‘robber barons’, ‘idle rich’ etc.) in these countries, who preceeded them 100-300 years ago. We find today’s richest populations up and down the income scale from rich to poor, much richer in terms of access to consumables and housing, health, education, leisure activities and such like, than the same relative high-income classes of those yester years.

The causes of these welcome increases in personal wealth enjoyed by the majority of the populations in the richer countries are, of course, controversial, but the stark difference between the richest populations and the poorest populations elsewhere across the world, is closely related to the extensive roles of markets, development, infra-structure, and enlightened states of knowledge, based on competing political rulers in democracies, personal liberties enjoyed by most poeople, and access to justice under law in the richest countries, and the relative - and in some dire cases - the almost total absence of such social norms, in the poorest countries. Economic and institutional political differences are among the common differences between developed and undeveloped countries.

That is why I agree with McCloskey that poverty is more important than inequality. Those risking everything to escape from their poor-world poverty to participate, in rich-world poverty, provide a salutary service to electorates in the richest countries and their political parties.

Concentrate on encouraging similar institutional and behavioural changes that have been conclusively demonstrated to work at reducing world poverty through raising per capita incomes from under $3 a day towards $20, $40, $80 a day through their market - state economies. This may take time, but decades, centuries in some cases, have been wasted in the recent past in pursuit of ‘quick fixes’ and ‘political’ experiments (socialism, marxism, oilgarchies and family dynasties, planning, and so-called ‘aid’ - much of it syphoned off in corruption and unsustainable projects).

Hence, as a Smithian political economist, I look forward to hearing what Deirdre McCloskey has to say, and warmly recommend her two previous volumes, “Bourgeois Dignity” and “Bourgeois Virtue”, Chicago, to those who have not yet read them (try Amazon for low priced volumes).

MARKETS VERSUS STATE: THE UNRESOLVABLE DILEMMA?

“No country in recorded history has grown as fast – and moved as many people out of poverty – as China over the last thirty years. A hallmark of China’s success has been its leaders’ willingness to revise the country’s economic model when and as needed, despite opposition from powerful vested interests. And now, as China implements another series of fundamental reforms, such interests are already lining up to resist. Can the reformers triumph again?

In answering that question, the crucial point to bear in mind is that, as in the past, the current round of reforms will restructure not only the economy, but also the vested interests that will shape future reforms (and even determine whether they are possible). And today, while high-profile initiatives – for example, the government’s widening anti-corruption campaign – receive much attention, the deeper issue that China faces concerns the appropriate roles of the state and the market.”

Comments

Stiglitz confronts the dominat issue that has contrary remedial policies for adherents of the idealogical “solutions” to the question he asks about “the deeper issue” facing China” (and every other country too) of “the appropriate roles of the state and the market.”

China’s “deep” question is not unique. The same question dominates all countries that exist, or could exist anywhere since Homo sapiens walked upright out of the African bush.

The division of labour was not invented in a ‘pin factory’; it appeared long ago with early humans because of wide variations in human abilities, some were good at tracking sources of food, especially sources of meat, others weren’t; some were better at knapping stone tools or sharpening woodern weapons to secure food (and kill competitors or other predators); others good at making fires and finding and securing night-time sleeping places; and so on across the skill sets that separated small groups living on nature that were necessary for survival. Some, albeit, minmal co-operation within the separate groups trumped short-sighted individual tendencies to regular violent selfishness.

It was ever thus. And still is, albeit on a larger scale with our higher technologies.

Today, the first few thousand of the human species has now become 7 billion strong and counting. The false question is not whether we rely solely on state or market provision; we are bound to have both. Indeed, it is hard to imgine doing without one or the other. Of course, we can have too much of one and too little of the other. But a stateless market system (a Hard Libertarian fantasy) or an absolute abence of markets (a tried and absolutely failed communist utopia) realistically are not ever going to be on the human Agenda.

The only real argument is always about the appropriate balance of markets within states, because human societies need both and, I would venture to suggest, in our high-tech complex societies, they cannot subsist for long with all of one (total state provision) and no markets, or vice versa, except in the fantasies of those who are not paying attention either to the present arrangements or to written history and so-called ‘pre-history’. The latter is ‘written’ in the remnants of the past that once walked the Earth, in which are found their archeological and skeletal remains “written” in their detritus (See: Cyptian Broodbank. 2013. “The Making of the Middle Sea; a history of the Mediterranean from the Beginning to the Emergence of the Classical World”: Thames and Hudson).

Sunday, May 18, 2014

ADAM SMITH'S UNDERSTANDING MORE USEFUL THAN KARL MARX'S CAPITAL

Deborah Boucoyannis (22 April) in the Washington Post proclaims that “Adam Smith is not the antidote to Thomas Piketty” in her review/article on Thomas Piketty’s, “Capital in the 21st Century (Harvard University Press). I have refrained from commenting on Piketty’s large volume because my copy was delayed (at Amazon) until a few day ago, and I have not begun reading it until to several other tasks were completed. When I read it I shall compose my thoughts as appropriate.

In the meantime, I have been thinking about inequality in the rich countries and what it means. I have been struck for many years by the phenomenon of inequality and why we appear to be concerned about it, particularly as some of the reasonably well-off middle-classes in the richest economies are expressing strong views about it.

I observe merely that for all the disparities in income between the majority of the populations in Europe, North America, Australia, New Zealand and other places, now fashionably summarised as the “99 to 1 percent”, there is a steady and continuing stream of seriously poor people from the poorest countries and continents, often at great risks to their life-expectancy, using desperate means of travel at prices charged by human traffickers, to the rich countries inevitably to join the poorest of the 99%.

In short, inequalities of ’99-1%’ do not deter them from these risks. Why then do the poorest in the rich countries (or the middle-income people who claim to speak for them) who are incomparably richer than the poor in the poor countries, complain about their relative poverty in the rich countries while poorer people risk their lives to join them?

Now be clear, I ask these questions not in order the make a case that we should be unconcerned about the poorest in the poor countries, nor unconcerned about the poorest in the rich countries - far from it! I have chastised some well-off activists, writing from the relative splendours of their middle-class lives in, say California, who find that their lives in the USA disgusts them on moral grounds. They have the means available to them to pay for their air-travel to any of the poorest countries to satisfy their dreams of moral simplicity and escape from their moral dilemmas and angry disgust. (I should note here that I have corresponded with some of the very few who swapped their ‘empty’ lives in the richest country in the world for what they perceive as their now simpler moral lives in the poorest countries. I respect them for that).

We are assured that the ’99-1’ of current inequality is a recent development and it is getting worse. What was tolerable in the recent past is no longer the case. The fault-line is caused by looking ‘upwards’ to the life-styles of the super rich in the rich countries and not downwards to the relatively poor in the same rich countries. As for the desperate poor in the poor countries, no remedies are sought, other than the magificent charitable actions of those moved by their desperate plight, which does not alter the fundamentals of why much of the world remain desperately poor despite increasing numbers of very poor people joining their relatively richer brethren.

For these reasons, I feel that Deborah Boucoyannis in her headline: ”Adam Smith is not the antidote to Thomas Piketty” is historically and empirically wrong (note I am saying that Deborah is wrong, nor that Thomas is wrong - I have yet to read his analysis to make a comment on his work). I shall elaborate in a defence of Adam Smith.

Adam Smith’s analysis of the political economy of the evolution from warlord, feudal, agricultural societies that had evolved and endured for millennia through to commercial societies that re-emerged after the fall of Rome, nearly a milennia earlier, contained a great deal of explanatory power. It was not perfect by any means and by the time he did his intellectual work of explanation, the elements of the ‘commercial’ system were in place, but not irreversible.

Smith did not invent, nor design, nor boost the development of the new imperfect commercial economy at all. Economies are not something that is designable, so to speak. Smith in short, did not “invent capitalism”, as many epigones claim (he died long before the word was invented). He also had many criticisms of prevailing practices that had also emerged quite early, such as ‘mercantile political economy’, ‘State created’ monopolies’, violent displacement of indigenous societies by European colonies, and wars between nation-states scrambling for colonies, and absolute monarchial powers that restricted personal liberties by government and or religious fiat.

Commercial activities changed the world, not intentionally, but despite the settled inhibitions of the past many millennia, perhaps best demonstrated by the historically unique rise in per capita incomes from the $1 a day norms of the recent past towards, eventually, the $120+ a day norms of the richest countries of today. For now billions who enjoy these norms of $60-120+ a day, the gap between them and the remaining billions stuck with around $1-10 a day is glaring, and rightly of moral concern. But what can be done about it quickly is not answerable with any political manifesto, street demonstration, revolutionary action or world summit conference of hand-wringing noisy delegations.

Adam Smith’s contribution in Moral Sentiments and Wealth Of Nations, and his other surviving Works was to lay the basis for explanations of what happens, and what happened, in that long evolution, in a few fortunate countries at first, later in many more, but with many countries yet to join productive wealth creation (defined by Smith as the production of “necessaries”, later “conveniences”, and lastly, “amusements”). None of this wealth can be created without the productive co-operation of billions of individuals and market activities in stable states, under the rule of law and justice. Of that Smith was clear.

Smith made no predictions (except in a hundred years from 1776, the new American state would be wealthier than Britain - how accurate he was on that!) and no human can, or ever will, predict the future of the world’s human societies. Smith used philosophy to attempt to understand the world’s socio-economies; he did not, unlike Karl Marx in his 19th-century ‘Capital’ and other writings, see his role as changing the world, a fatal weakness exemplified by how Marxist misunderstandings led to tyranny and to appalling costs in human misery, and noticeable inequalities at low levels of per capita GNP.

I have yet to read Thomas Piketty - it is by my desk. I shall approach it without pre-formed prejudices - its a longtime since I read Marx’s Capital in my late teens and I shall in due course comment upon what I learn from Piketty in my middle-70s.

to block projects like the San Antonio streetcar project for their own

selfish reasons (“Opposition co-opting the American Dream,” Another

View, April 24). But it looks as if he attempts to hijack economist Adam

Smithand Pope Francis in support of streetcars.

He quotes Adam Smith about private interests in “some respects” being the opposite of public interests. “Some respects” is not in all respects, and Smith mentions this in the context of businesses trying to get taxes or regulations imposed on the public. Smith says when a merchant pursues his self-interest, it “leads him to prefer that employment which is most advantageous to society.”

It is well known that he was suspicious of business, but he also worried about government going too far: “There is no art which one government learns” more quickly than “draining money from the pockets of the people.”

Smith listed three major functions of government: national defense, crime prevention and beneficial public works that could not be profitable for private firms to undertake. The latter had two ends: facilitating commerce and education.

Barker does not explain how streetcars will facilitate commerce. Maybe they will. But for a project like this, we need cost-benefit analysis, and Barker provides none. Adam Smith suggested such public works need this. … It is not even clear that we have been relying on the invisible hand of self-interest in this country. Yes, some industries have been de-regulated in the past 35 years, but regulatory spending by federal agencies is about nine times higher today than it was in 1970, adjusted for inflation. We add thousands of pages of new regulations each year. That is not an invisible hand at work. In the 1950s, about 5 percent of jobs required a license. Now it is about 30 percent. Now some people face marginal tax rates of 50 percent or higher when both federal and state income tax rates are considered. Again, it does not look like the invisible hand in action.” …

So let's take a good look at streetcars before we give the OK.”

Comment

Dr Cyril Morong draws Adam Smith into a simple local story of interest to the good folks of San Antonio. Now, it may be that Adam Smith (1723-90) had something useful to contribute about people choosing or refusing to have a street-car system (in Scotland, known as ‘Trams’) built in their town in the 21st Century.

Assuming that is the case - though when Smith was alive there were neither street-cars nor trains situated in Scotland (or anywhere else in the world). So what else does Dr Morong think Adam Smith favoured as suitable for public expenditures. We knowSmith favoured public expenditure on local pavements, refuse collection and disposal, harbours and main roads.

Dr Morong suggests “three major functions of government: national defense, crime prevention and beneficial public works”. The first duty of government is ‘defence’, but I would question whether the second duty was “crime prevention” as being too narrow. Smith called it “justice”, an altogether much wider remit that “crime prevention”, though local practices in San Antonio may conceive of justice rather narrowly - the cliched figure of a sheriff with a six-gun, etc. Justice is a much wider idea, where differences of opinion among the citizenry do not only or necessarily involve criminality. Lastly, “beneficial public works” is insufficent to discriminate suitable public works.

Smith was a pragmatist, not a zealot. It was a matter of finding what worked and what didn’t. Privately built roads could be well managed and superior in construction - they could also be poorly run or repaired by poor public management; publicly built and managed roads were not immune to the same weaknesses. After a road is built it has to be maintained for many years. Much experience of large-scale public projects and private ones in much of the world suggests the rapid deterioration of public roads, bridges and buidings is common, in rich as well as poorer countries.

In projects for “facilitating commerce and education” there is vast historical experience. Scotland had an ambitious education system from the mid-16th century onwards of a “little school” in every parish, partly funded by charties, public expenditures, and parental contributions that gradually spread basic literacy across generatiions of young children and provided a route to university for 14 year-old boys (girls were left to their parents efforts to the 19th century). Scotland had four universities for its small population, while England had just two for its many times larger population.

Dr Morong says that Smith said: “when a merchant pursues his self-interest, it “leads him to prefer that employment which is most advantageous to society.” Smith was always careful both directy and by implication from context not to equate “self interest” by any section of a community” with being “most advantageous to society.” It always depended on the nature of a merchants, or anybody else’s, self-interest. Smith argued that “self-interested’ actions - lobbying for tariffs and prohibitions, laws against “combinations” of labourers, monopoly product licences, local trade monopolies, apprentiship laws, the ‘settlement’ laws, restrictions on trades, judgements by local magistrates (often local businessmen) and such like, that suited the self-interests of the beneficiaries but were against the interests of consumers and residents.

In short, Dr Morong’s linking of truncated versions of Adam Smith to the “street car” controversy in San Antonio is quite unsound historically and, I suspect, in detail. Incidently, Adam Smith gave over 60 examples in Wealth Of Nations of the negative consequences of “self-interested” actions by individuals experienced by those affected by them. OK?

Sunday, May 11, 2014

THEY CREATED A FANTASY AND CALL IT A SCIENCE

In Chrysalis (“In the emergency of the day is …emergence”) HERE http://longsworde.wordpress.com/2014/05/08/cat-religion-and-the-invisible-hand/

"Cat Religion and the Invisible Hand"

"My cat worships the human hand. As far as my cat is concerned, or so it seems, the rest of me is of no interest. I imagine that if cats were to possess more reason, they would probably make a religion and an idol of the Hand. “Paws not good. Only the Hand is good”.

'Skinfulness' would be righteous. Furiness inferior. Fingers divine. Claws corrupt. What is like unto the Great Hand? What is equal to the power of the Great Hand?

Something like a primitive cat religion lies behind the famous “Invisible Hand” of the market society. Neo-liberalism is a primitive religion, in that respect — like cat religion. Maybe even an elite priesthood amongst cats would emerge whose sole purpose was to determine the will of the Great Hand and devise prayers and rituals for invoking stroking and calling down the blessings of the Great Hand from on high. Cat scientists and theologians would study the divine fingers of fate and the mysteries of the opposable thumb, and perhaps cat genetic engineers would dream of ways of changing paws into hands, claws into finger nails.”

Comment

In treating a metaphor as a real entity which they believe actually operates in society you end up with fantasies. When these fantasies are believed by economists, including Nobel Prize Winners, you leave reality and belittle claims to economics being a science. It becomes a mere gossip with as many contributors as there are credulous people dominating the conversation.

Saturday, May 10, 2014

WHERE IGNORANCE PREDOMINATES, MORAL CONFUSION THRIVES

“Adam Smith was a Scottish moral philosopher in the 18th century. His flagship work, An Enquiry into the Wealth of Nations [sic - incorrect title], propelled him into a leadership role with respect to economic thought. His ideas were clear and compelling. With respect to labour, he explained how each person’s employment inadvertently benefited society, [Smith was referring to a merchant's behaviour not a labourer's employment!] “By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain. He's in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”. Fundamentally, what he was saying 233 years ago is people are basically selfish [Nonsense!] and any good that comes to society as a result of our industry is an unintentional byproduct. This notion became known in economics as the invisible hand. The economy just worked as a result of each person seeking to improve his or her lot without much regard for the welfare of others. [To make anything and sell it requires the co-operation of many others before anybody buys it and buyers must co-operate with others to acquire the money to buy anything]

Fast forwards to 2009. People are still inherently selfish. [Evidence?] Most people make decisions based on the “what’s in it for me?”. [Gross exaggeration!] Principle. The invisible hand is still at work. What Adam Smith couldn't foresee, however, was our population explosion combined with globalisation. In the world of Adam Smith, nations were islands of independence [Kings and Queens in the separate kingdoms of Europe were related by rivalry and marriage and often at war] and there was no Internet. So what? In a world of the advantaged and the severely disadvantaged, where ideas can spread like viruses across the globe via the Internet, we're compelled to care for the welfare of all people. [Many fewer billions 'live' on under $1 a day than ever before in all of human history in the last 20 years - globalisation works!]

People like Osama bin Laden are extremely powerful [living in a cave and in hiding?] because they're propagators of [evil] ideas. [such as: Kidnapping and selling 200+ young girls!) .Their ideas spread easily by virtue of technologies like the Internet and their ideas appeal to the most disadvantaged [and the most disgusting].

Those with nothing having nothing to lose. they're easily attracted to the idea of blowing up the world. At least large portions of society. Starting over. Those of us with a comfortable existence and lots of prospects for the future, have lots to lose. we're quite comfortable with the status quo.

The status quo, however, is at risk. If those of us who “have”. Continue to act as if those who “haven't”. Don’t matter, we'll find one day that the status quo has blown up in our faces. The business model of pursuing maximum profit with no regard for the impact of our business on others is obsolete. If we value our planet, we've no choice but to think holistically. We must balance our pursuit of profit with a proactive contribution to making the planet a better place.

Adam Smith’s world was a much simpler, somewhat protected world. [Life expectancy in Smith’s time was low - death in childbirth was common; tyrants killed many people!] Our world is complex, interconnected and vulnerable. If we intend only our own gain, we'll be “led by an invisible hand to promote an end which was no part of his intention.”. With men like Osama Bin Laden at large [he’s dead!] , that end won't be pretty. Terrorism finds a fertile home in the minds of the disadvantaged [and the most disgusting]. If Adam Smith were alive today, I’m sure he'd observe baker, butcher and brewer have no choice but to think beyond themselves and consider the benevolence of all people and how they might share their wealth to feed the world’s poor.” [Smith gave most of his wealth and savings away in charitable gifts throughout his life and his correspondence shows him helping many people find paid employment!]

[The author of this piece displays deep ignorance of Adam Smith (and also of punctuation!). Why? To sell information about discounted hotel rooms on the back of trashing a dead person's moral reputation! If that is not morally dubious, I do not know what is!]